Josh Weiner
The United States is teetering closer to economic turmoil as sweeping new import tariffs announced by President Donald Trump raise fresh concerns among global economists. Allianz’s Chief Economic Advisor, Mohamed El-Erian, cautioned on Friday that the risk of a U.S. recession is now “uncomfortably high,” with inflation pressures mounting and growth projections sharply downgraded.
Speaking with CNBC during the Ambrosetti Forum in Italy, El-Erian underscored that Trump’s expansive tariff plan—described as “reciprocal” in structure—is having a broad impact, not just on the American economy but across global markets.
“We’ve seen a dramatic shift in expectations,” El-Erian said. “Recession risk for the U.S. is approaching a 50% probability, and inflation expectations are now hovering around 3.5%.”
While he stopped short of declaring a downturn inevitable, El-Erian noted that the structural resilience of the U.S. economy may not be enough to offset the damage if the current trajectory continues. “The economy remains strong at its core, but the headwinds from trade friction are growing stronger.”
Growth Downgraded, Inflation Pressures Mount
The economic outlook has dimmed in recent weeks, with several analysts slashing their U.S. growth forecasts. El-Erian now expects GDP growth to slow to between 1% and 1.5% for the year—a stark contrast to the International Monetary Fund’s earlier projection of 2.7%.
“If we start nearing 1% growth, we enter what’s called ‘stall speed,’ where the economy lacks momentum and becomes vulnerable to shocks,” he explained.
Adding to the concern is the potential for inflation to rise faster than anticipated. Last week’s release of the Fed’s preferred inflation gauge—the core personal consumption expenditures (PCE) index—showed the largest monthly increase in over a year.
El-Erian believes markets are miscalculating how much room the Federal Reserve has to respond. “If we’re fortunate, we may get one rate cut this year,” he said. “But four? Highly unlikely. In fact, we may not see any at all.”
The Federal Reserve, which kept rates steady in March at 4.25%-4.5%, had hinted at two cuts by the end of 2025. But current market expectations, tracked by CME Group’s FedWatch Tool, still price in four rate cuts for this year alone.
Global Spillover and Currency Impacts
The ripple effects of the tariff shock have already begun to surface in currency markets. In the hours following Trump’s announcement, the euro and British pound rallied, touching six-month highs against the U.S. dollar.
Despite this initial reaction, El-Erian said he does not expect a prolonged dollar decline. “Markets reacted to the immediate prospects of slower U.S. growth and lower capital inflows,” he said. “But if the U.S. slows, other regions will likely decelerate even more—limiting the dollar’s downside.”
He emphasized that while short-term damage from the tariffs is undeniable, the long-term implications remain unclear. “There’s consensus on the near-term pain,” El-Erian said. “But whether that translates into future economic gain is still up for debate.”
Final Outlook
As the U.S. heads into a critical economic period marked by heightened trade tensions and policy uncertainty, El-Erian’s comments serve as a sobering reminder of the stakes involved.
“These tariffs are more than just a negotiation tactic,” he said. “They could be the turning point that redefines global trade dynamics and shifts the trajectory of the world’s largest economy.”
